DSW Market Research & Analysis Report
Updated Jan 28, 2016

Growth and Balance Sheet

The company reported net income of $39 million, or 44 cents diluted earnings per share for the third quarter of fiscal year 2016 ending October 31. That's down from net income of $50 million, or 56 cents diluted earnings per share for the same quarter last fiscal year. Revenue for the third quarter was $666 million, virtually unchanged from $670 million for the same quarter last fiscal year. Comparable sales decreased by 3.9% compared to the same quarter last year, primarily due to weather conditions, a weak macro environment and execution. Transactions were flat year-over-year, with decrease in store traffic, but increase in online traffic. Both of company’s segments recorded a small decrease in revenue in comparison to the same quarter last year. DSW segment revenue for the quarter was down 0.6% to $629 million. ABG segment revenue was down 1% to $37 million. The gross profit margin deteriorated by 270 basis point to 29.9% for the current quarter, in comparison to 32.6% for the same quarter last year, primarily due to marketing related markdowns, and adjustments on a special inventory purchase. Operating expenses as percentage of sales for the current quarter were 20.4%, and 20.7% for the third quarter last fiscal year. Net cash provided by operating activities for the nine months ending October 31, 2015 was $145 million, up from $131 million for the last year. Cash and cash equivalents as of October 31, 2015 were $90 million, in comparison to $96 million as of November 1, 2014. DSW forecasted EPS for the fourth quarter of fiscal year 2016 is expected to be from 3 cents to 10 cents, compared to actual EPS of 34 cents for the fourth quarter of last fiscal year. The financial strength indicators of the company are at satisfactory levels. Company’s current ratio is 2.36 same as the industry average ratio. The quick ratio of 0.54 is worse than the industry average of 1.47. The company currently does not have any outstanding debt. In terms of efficiency and effectiveness, the asset turnover ratio of 1.78 is at better levels than the industry average of 1.36; the inventory turnover ratio of 3.59 is better than the industry average ratio of 2.87; and the ROE of 15.33% is behind the industry average of 20.8%. 

Valuation

DSW PE stands at 13.38 below the industry average of 16.04, and below the stock market average represented by the S&P 500 P/E of 20.69. The company is currently trading below the maximum P/E ratio of 15x, and over the last five years, the company’s shares have traded in the range of 10.59x to 64.31x trailing 12-month earnings. DSW's current Price/Sales of 0.78 is above the average of its industry of 0.69. DSW’s head to head comparison to its main competitors shows that the company has the average gross margin, and one that is below the industry average. The achieved operating margin by the company is one of the best result among the competition, and more than double the industry average. The company quarterly revenue growth is negative and second worst result among the selected peers, and below the industry average. The company trades at the higher P/E than M, and it also trades at the highest P/S ratio of the selected peers. DSW’s twelve trailing months EBITDA of $317.06 million is below the selected competitors’ EBITDAs, but it is above the industry average EBITDA of $53.33 million. The stock is currently trading below its intrinsic value of $26.59, this suggests that the stock is currently undervalued at these levels. The beta of 0.79 implies lower volatility of the stock with respect to the S&P 500. DSW has shown favorable earnings consistency over the last five years. Moreover, company’s earnings have increased by 32.75% over the same period. The current quarter earnings in comparison to the same quarter last year have decreased by -21.4%. DSW’s current price levels are above the maximum level, 41.10% below the 52 week high of $39.58, and the technical analysis give neutral view of the stock. The majority of analyst ratings are hold. DSW has a twelve trailing month dividend ratio of 45.32% and trailing annual dividend yield of 3.40%.

About DSW

DSW Inc. is a footwear and accessories retailer. The Company offers assortment of shoes, handbags and accessories for women and men. The Company operates through two segments: the DSW segment and the Affiliated Business Group (ABG) segment. Its DSW segment includes DSW stores and dsw.com. The Company separates DSW merchandise into four primary categories: women's footwear; men's footwear; athletic footwear; and accessories and other. The ABG segment partners with four other retailers to help build and optimize their footwear businesses. As of January 31, 2015, the Company operated 431 DSW stores in 42 states, the District of Columbia and Puerto Rico. DSW stores average approximately 21,500 square feet and carry approximately 22,000 pairs of shoes. The Company also offers DSW Rewards, through which members earn points towards certificates every time they purchase.

Competitor Comparison

DSW Inc. (NYSE: DSW) N.V.

Highlights

DSW Inc., together with its subsidiaries, operates as a branded footwear and accessories retailer in the United States. The stock closed yesterday’s trading session at $23.30. In the past year, the stock has hit a 52-week low of $21.23 and 52-week high of $39.58. The intrinsic value of the stock is above the current price. DSW has a market cap of $2.01 billion and is part of the Services sector.

• Wide product portfolio
• Distinctive and convenient store layout
• Focus on providing  value added offerings to its customers

• Single market concentration

DSW Intrinsic Value

Stock Valuation Model & Intrinsic Value Definitions

Investors should keep an eye open for stocks that are trading within 10% of their 52-week highs, as it is likely to continue in its upward trend. DSW's 52 week high is $39.58, current price is $23.30, is 41.1% below the 52 week high.

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 years, must be "moderate", which in this model states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. The company has a P/E ratio of 13.38, the average industry P/E ratio is 16.04, and is below the S&P 500 P/E ratio of 20.69.

When there is strong insider ownership which we define as 8% or more, management is more likely to act in the best interest of the company, as their interests are right in line with that of the shareholders. Insiders own 8.81% of DSW stock. Management's representation is large enough. This does satisfy our minimum requirement; companies that pass this test are more attractive to our valuation model.

The model is using several technical indicators (MACD, RSI, MFI, OBV, position Indicators) to forecast the trend of the stock for 6 and 12 months, and assign a value.

DSW is trading in the range of $21.94 - $24.76 in the past 30 days. The stock has been showing support around the level of $22 and resistance in the $26 range. The stock is trading close to the 50-Day Moving Average and below the 200-Day Moving Average. The RSI(14) is 48.65. The stock was in a bullish trend from May 2014 to April 2015, gaining around 67%. From April 2015 to present the stock returned all the gains that were made in the period mentioned previously and is currently trading at the same price from May 2014. The stock seems that found support back in November at around $22, and bulls were having the upper hand in the last couple of months of 2015, but the stock plummeted back down in 2016 on general market conditions. But since the stock did not went below the support level, we believe that the stock might have hit its lowest point. Our indicators give neutral view of DSW.

The financial health of the company the higher the better, we evaluate all the financial ratios of the company.

Investor’s sentiment for the stock.

The model assigns a value according to analyst’s recommendation for the stock. Analyst rating on Reuters.com are 3 Buy, 3 Outperform, 12 Hold, and 2 Underperform.

We are searching for EPS numbers that are better than the previous year's. One dip is allowed, but the following year's earnings should be higher than the previous year. DSW’s annual EPS for the last 5 years were 0.41, 2.27, 1.62, 1.65, and 1.69 this type of earnings action is favorable.

The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry. DSW currently does not have any outstanding debt.

The EPS growth for this quarter relative to the same quarter a year earlier is above the minimum 15% that this model likes to see for a "good" growth company. Stocks with improving earnings are worthy of your extra attention. DSW’s EPS growth for this quarter relative to the same quarter a year earlier is -21.4%, below our target.

This stock valuation model looks for annual earnings growth above 12%, but prefers higher than 20%. DSW’s annual earnings growth rate over the past five years is 32.75%, above our target.

¹Tradespoon Score and Outlook: This score conveys Tradespoon’s long-term outlook of 1 to 5 years for a particular stock. Tradespoon uses proprietary methods to rate its trading picks on a scale from 1 to 10, with a 10 being the most favorable expected risk and return outlook. To determine a stock’s rating, Tradespoon uses an advanced algorithm that factors in fundamental and technical analysis to determine a stock's expected risk and return.